Question 1

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

The answer of Describe the process in the money market...

Question 2

In the short run, what effect does an increase in the money supply have on interest rates and aggregate demand?

Accepted Answer

A)  It causes interest rates to increase and aggregate demand to shift right. 
B)  It causes interest rates to increase and aggregate demand to shift left. 
C)  It causes interest rates to decrease and aggregate demand to shift right. 
D)  It causes interest rates to decrease and aggregate demand to shift left.

Question 3

If a central bank targets the interest rate, what does this imply?

Accepted Answer

A)  The central bank can then set the money supply at whatever value it wants. 
B)  The central bank must increase the money supply if the interest rate is above its target. 
C)  The central bank must decrease the money supply if the interest rate is above its target. 
D)  The central bank must not change the money supply.

Question 4

Who first proposed the theory of liquidity preference?

Accepted Answer

A)  Adam Smith 
B)  John Maynard Keynes 
C)  David Ricardo 
D)  Irving Fisher

Question 5

According to liquidity-preference theory, when would the money-supply curve shift right?

Accepted Answer

A)  if government spending increased 
B)  only if the Bank of Canada chose to increase the money supply 
C)  if the interest rate decreased 
D)  if the price level fell

Question 6

According to liquidity-preference theory, if the price level increases, in which direction does the demand curve shift, and how does the interest rate change?

Accepted Answer

A)  The demand curve shifts right, so the interest rate increases. 
B)  The demand curve shifts right, so the interest rate decreases. 
C)  The demand curve shifts left, so the interest rate decreases. 
D)  The demand curve shifts left, so the interest rate increases.

Question 7

When a central bank sets a target for the interest rate, what does it commit itself to?

Accepted Answer

A)  revealing its target to the public 
B)  adjusting the demand for money in order to make the equilibrium in the money market hit that target 
C)  adjusting the money supply in order to meet the interest-rate target 
D)  having to make open-market sales

Question 8

How does a reduction in the money supply by the Bank of Canada make owning stocks less attractive?

Accepted Answer

The answer of How does a reduction in the money...

Question 9

What do some economists believe will happen when interest rates drop to almost zero percent?

Accepted Answer

A)  tax revenues increase due to the easy access to money 
B)  the currency appreciates and exports fall 
C)  governments increase taxes to make up for budget shortfalls 
D)  a liquidity trap sets in and monetary policy becomes ineffective

Question 10

According to liquidity-preference theory, what is the shape of the money-supply curve?

Accepted Answer

A)  upward sloping 
B)  downward sloping 
C)  vertical 
D)  horizontal

Question 11

Which statement best describes the interest-rate effect?

Accepted Answer

A)  As the money supply increases, money demand decreases, the interest rate falls, so spending rises. 
B)  As the money supply increases, money demand decreases, the interest rate rises, so spending falls. 
C)  As the price level increases, money demand increases, the interest rate falls, so spending rises. 
D)  As the price level increases, money demand increases, the interest rate rises, so spending falls.

Question 12

What does liquidity refer to?

Accepted Answer

A)  the relation between the price and interest rate of an asset 
B)  the risk of an asset relative to its selling price 
C)  the ease with which an asset is converted into a medium of exchange 
D)  the sensitivity of investment spending to changes in the interest rate

Question 13

According to liquidity-preference theory, if the price level increases, how do the equilibrium interest rate and the aggregate quantity of goods change?

Accepted Answer

A)  The interest rate and the quantity demanded rise. 
B)  The interest rate rises and the quantity demanded falls. 
C)  The interest rate falls and the quantity demanded rises. 
D)  The interest rate and the quantity demanded fall.

Question 14

In this question, we try to find out whether using the bank rate as a monetary policy tool is consistent with the liquidity-preference theory. Theoretically, when the Bank of Canada changes the bank rate and implicitly the money supply, the market interest rate would change to become equal to the bank rate AND to equate the new money supply with the money demand. But is this double role of the market interest rate possible? Let us give an example and see what happens. Assume the money demand curve is MD=150 - 15r, and the money supply curve is MS = 100 - 10R, where r is the market interest rate and R is the bank rate announced by the Bank of Canada.
a) Show that, for a given value of bank rate R, the equilibrium market rate is different from R. What does this example show?
b) Given the money demand equation MD=150 - 15r, find a money supply equation such that, for any value of R, the equilibrium market interest rate r is equal to R.
c) For the money supply equation MS = 100 - 10R and a given bank rate R, show how the market could balance at the market interest rate r = R (show what the Bank of Canada should do to balance the money market).
d) What have we learned from this exercise?

Accepted Answer

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Question 15

According to liquidity-preference theory, how does a decrease in the price level affect the interest rate and output demanded, respectively?

Accepted Answer

A)  The interest rate increases, and output demanded increases. 
B)  The interest rate increases, and output demanded decreases. 
C)  The interest rate decreases, and output demanded increases. 
D)  The interest rate decreases, and output demanded decreases.

Question 16

Figure 15-1 
-Refer to Figure 15-1. What is most likely to happen if the interest rate is equal to 2?

Accepted Answer

A)  There is an excess demand for money, and the interest rate will fall. 
B)  There is an excess supply of money, and the interest rate will rise. 
C)  There is an excess demand for money, and the interest rate will rise. 
D)  There is an excess supply of money, and the interest rate will fall.

Question 17

In which situation do people want to hold less money?

Accepted Answer

A)  when the price level and the interest rate increases 
B)  when the price level and the interest rate decreases 
C)  when the price level increases and the interest rate decreases 
D)  when the price level decreases and the interest rate increases

Question 18

In liquidity-preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money-demand curve.

Accepted Answer

A) True 
 B)False

Question 19

Why do people primarily own or hold money?

Accepted Answer

A)  because it has a guaranteed nominal return 
B)  because it can be invested for a guaranteed real return 
C)  because it can be used directly to buy goods and services 
D)  because it functions as a unit of account

Question 20

If the U.S. puts tariffs on Canadian-manufactured products and Canada has a flexible exchange, which of the following will occur?

Accepted Answer

A)  Canadian interest rates will initially rise above the world interest rate 
B)  there will be no permanent effects on Canada's aggregate demand curve 
C)  Canadian net exports will increase in the long run 
D)  the Canadian dollar will permanently appreciate

Exam 15: The Influence of Monetary Policy on Aggregate Demand